Influential hedge fund Third Point cashed in Monday on its investment in Yahoo, a dramatic sign of success for the first phase of the once-troubled tech company's turnaround. But traders pushed shares down more than 4%, to $27.86, a vivid reminder of the challenges ahead if the company is to transform itself for the long term.

"Yahoo has yet to reinvent itself," says Vivek Wadhwa, vice president of academics and innovation at Singularity University. "They should be using the money for creating more innovation and advancing the technology rather than playing around with the stock price. This sends a red flag."

Yahoo announced plans to buy back 40 million shares of common stock from Third Point at $29.11 a share, or nearly $1.2 billion.

The buyback underscores a pivotal period for Yahoo. While CEO Marissa Mayer has performed a massive makeover of Yahoo in her first year in the top spot, it remains to be seen how the company will add revenue in an advertising environment dominated by Google and Facebook.

The next item to watch is how Yahoo's directors reconsider the board's size and composition. "Who the new directors are will give you a sense for Yahoo's strategic change in the next three to five years," says Jason Schloetzer, an accounting professor at Georgetown University.

Activist shareholder CEO Daniel Loeb locks in a massive $665 million payday for Third Point, affirming his turnaround vision and role as a key player in Yahoo's reversal of fortune. His effort in the ouster of former Yahoo chief Scott Thompson paved the way for Mayer's arrival. He steps down from Yahoo's board along with two other hedge fund members as of July 31. Third Point plans to keep 20 million Yahoo shares.

What also remains to be seen is how Yahoo moves forward without Third Point's input. Loeb's Third Point exit comes as Yahoo under Mayer has seen shares soar more than 70%.

Loeb's hedge fund cashed in a remarkable 129% gain from its initial investment, according to Bloomberg. Dating back to September 2011, Third Point took a 5.2% stake in Yahoo and agitated for removal of the board, when shares traded between $12 and $15.

Loeb's pressure for change at the Internet pioneer came after years of slipping stature in advertising and aimlessness in strategic direction. Yahoo's decline was punctuated by the company spurning Microsoft's $44.6 billion acquisition offer in 2008, to the dismay of many on Wall Street.

Amid its reversal, Yahoo shares have in recent weeks come close to the $31-per-share offer from Microsoft, reaching $29.83.

Third Point declined to comment on Yahoo's stock repurchase.

"They have been incredibly supportive as we have built our executive staff and developed our strategy, and they have helped position Yahoo for future success," Mayer said in a statement. "While there's still a lot of work ahead, they've given us a great foundation."

Mayer's steady renovation of Yahoo's services and its workforce has boosted the company's outlook. Yet what's been driving the stock price hasn't had much to do with Mayer but rather the company's swelling position in China's Alibaba Group, a collection of e-commerce sites.

The buyback would leave Third Point with less than 2% of the company's common stock.

Former Google executive Mayer has been credited with reinvigorating the company after a revolving door of CEOs made her No. 5 in four years. Under Mayer, Yahoo has grabbed 17 companies in the past year in a bid to add popular services such as photo-blogging site Tumblr, which it acquired in a $1.1 billion deal in May. The moves have given Yahoo, on a binge for adding talent, access to highly sought-after software engineers and designers.

Mayer has also been aggressively moving to improve Yahoo as place to work. Health plans have gained maternity-leave time, free food has been introduced, mobile phones have been switched from BlackBerrys to iPhones — and workers have been required to come in to the office.

"I'm confident that with Marissa at the helm and her team's focus on innovation and engaging users, Yahoo has a bright future," Loeb said in a statement.

But what remains to be seen is how Yahoo will reverse its eroding advertising position. Due to gains at Facebook and Google, Yahoo's position in the $17 billion U.S. display advertising market is expected to decline to 7.9% in 2013, down from a 9.2% share last year, according to researcher eMarketer.

While Google has made advances in display advertising and Internet search ads, Yahoo has struggled to gain traction. Facebook has also made inroads into display advertising, threatening Yahoo.

Industry experts point out that Mayer has done a solid job of improving Yahoo's services but that it remains to be seen how it will increase its advertising business. And to complicate matters, the industry is already moving on to the next frontier: mobile ads.

Highlighting its challenges, Yahoo last week reported a 1% year-over-year decline in second-quarter revenue and warned that the third-quarter and full-year estimates would come up shy of previous estimates.

Scott Kessler, equity analyst at S&P Capital IQ, says Third Point, once the company's second-largest shareholder, will have a "more passive" role as stakeholder following the buyback deal.

"It's an indication," he says, "they're acting as if maybe the work that they had put into the company was largely complete and the gains had largely been realized."